have dropped to $34 per square
foot this year.
Boston office vacancy is again on the rise and hovering around
21 percent. Prices have dropped to half of what they were in 2000, a trend the
city hasn’t seen since 1990, according to real estate services company CB Richard
Ellis.
“Things are pretty bad in Boston (for landlords),” said Michael Sherman, chairman
and partner of CB Richard Ellis-N.E. “In Massachusetts you’re going to see the
vacancy continue to inch up for another few quarters, and you’re going to see
non-positive action and then maybe some positive movement. If you’re a tenant,
it’s a great time to be brokering a deal.”
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Office leasing rates have dropped from almost a $60 per square-foot high in
mid-2000 to $34 now, a so-called “weak” market, a result of businesses renewing
their leases or moving to cheaper places, Sherman said. Vacancy rates in 2000
were at a low of 1.7 percent. Lease rates have steadily dropped since 2000,
after the fall of the dot-coms and the national scandals that rocked the corporate
financial world. The lease rate drop, he said, has hit landlords hard.
“It’s been difficult for landlords – one out of every five square feet is
empty, and the area around Greater Boston grows less than 1 percent a year,”
Sherman said. “If the market continues to grow at that rate, it would take you
20 years to use up that 20 percent vacancy. Because the tenant knows the landlord
needs (the lease), it’s driving all the (lease rates) down.”
Over time, things balance and eventually shift back, he said. For example,
a developer’s decision to rehabilitate a mill building could result in 1 million
square feet of office space, relieving the demand temporarily.
“In good times, a developer does that to create office space fast,” and have
it occupied quickly, Sherman said. Economically, if during a shortage a landlord
can rent a space for the same amount of money it would cost to build a new building,
why bother with construction and finding a place to build when businesses will
pay top dollar?
Even over the past year, prices have dropped noticeably and vacancies have
risen, from $38.99 per square foot and a vacancy rate of 14.9 percent in 2002
to almost $5 less this year in lease rates. In 1990, rates and vacancies were
similar to 2003 – the lease rate 13 years ago was $32.93 and the vacancy rate
was 19.6 percent.
“In tough times tenants move to better buildings for a better price,” he said.
“You have a shuffling from worst to best and the bottom of the barrel is hard
to occupy.”
Transforming former mill and other commercial buildings into residential and
non-business spaces also increases the shortage. The overall Massachusetts economy
has also played a part, Sherman said. A jobless economic recovery has meant
very little job growth in Boston and other cities, and it takes the market six
months to one year to absorb shadow space and vacancies, he said.
“One of the biggest pieces was the shrinkage of the tech companies and financial
services because of the economy and scandals,” Sherman said. Even some of Boston’s
largest tenants, like Fidelity and Putnam Investments have downsized.
From 2000 to this year to date, 115,700 jobs have been lost statewide, according
to the Bureau of Labor Statistics. Manufacturing has been the hardest hit –
like all other states – with a 19.38 percent drop in employment.
The two industries, Sherman said, that impact the office market the most –
information and professional and business services – suffered in Massachusetts,
with 12.62 and 11.96 percent decreases, respectively.
“Manufacturing tends to lose less total jobs because less people are there,”
Sherman said. The Metro North and West portions of Boston also have the highest
vacancy rates – North is at 28.6 percent and West is at 26.5 percent – because
those areas had the highest concentration of IT businesses.
While Sherman said it is true that the Boston business climate is on the road
to recovery, it is doing so with the same number of workers, but higher production
and more money. Those hoping for jobs now that companies are beginning to take
more financial chances aren’t being hired because those companies were forced
to become more efficient with less, he said.
“We’re at a point where real estate growth hasn’t started yet; it’s still
going down actually,” Sherman said. “It’s going to be great in one year, but
we need (space) occupied.”
In Providence, prices are still competitive with Boston and other deciding
factors like financial services and cost of living are still better here than
Boston, said Bill Parsons, deputy director of the Economic Development Corporation.
The problem in Providence and statewide, he said, is supply.
“The rents really won’t impact us much; the rents here are comparable,” he
said.
“The problem here is the product itself – there’s not much here. It’s not
just Providence – it’s all of Rhode Island.”
Lease rates in Providence range from $19 to $30 per square foot, according
to commercial real estate figures, so they are a better deal than Boston.
“There’s a lot of office space in Boston, so that doesn’t help us,” though,
Parsons said. “(But) it’s not really a concern. Companies are always attracted
to Boston.”
Boston will continue to prosper, thanks to its technology and education core
– Harvard and the Massachusetts Institute of Technology, and the city’s hospitals,
Sherman said.
“The good news is that the core reason why business grows here is as strong
as ever,” he said. “We’re losing manufacturing but we’re creating better jobs.”
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